NOTE

– 3

CONSOLIDATION OF VARIABLE INTEREST ENTITY

Milestone Medical

Milestone Medical is approximately 86% owned by Milestone Scientific as of June 30, 2016. Milestone Scientific has been established to develop and commercialize intra-articular and epidural drug

delivery instruments, utilizing an exclusive royalty-free license to Milestone Scientific’s CompuFlo technology. The license was contributed by Milestone Scientific for our initial ownership in Milestone Medical.

Since our initial investment in Milestone

Medical we have accounted for the investment in accordance with the equity method of accounting. However, during 2015, Milestone Scientific provided short term bridge financing to Milestone Medical in anticipation of the completion of a secondary stock offering in the Polish Market. In December 2015, Milestone Medical suspended their capital raise efforts meriting re-consideration of the initial accounting for the investment as an equity method investment. In April 2016, Milestone Medical cancelled the uplisting of its shares to the Poland Warsaw Stock Exchange.

As a result of the change in circumstances around the proposed offering in December 2015 by Milestone Medical, we reevaluated the relationship between the two entities and the status of Milestone Medical as a VIE. We have concluded

that Milestone Medical does not have sufficient capital at risk to support its activities without additional financial support from Milestone Scientific

Since the factors giving rise to concluding that Milestone Medical is a VIE happened so close to the end of fiscal year 2015, the acqui

sition date for measuring the consolidation of Milestone Medical has been deemed to be December 31, 2015.

In the second quarter of

2016, Milestone Scientific initiated a share exchange program pursuant to which we would exchange one share of common stock for every two outstanding shares of Milestone Medical common stock. As there was no change in control, the acquisition of the non-controlling interest is reflected as an equity transaction with the carrying value of the non-controlling interest adjusted to reflect Milestone Scientific’s increased ownership interest in the subsidiary. As of June 30, 2016, 3,965,000 shares of common stock have been issued in exchange for 7,930,000 shares of Milestone Medical common stock. An additional 532,542 shares were issued but not outstanding as of June 30, 2016. As a result of these exchanges, Milestone Scientific owns approximately 86% of Milestone Medical at June 30, 2016.

As a result of our increased ownership in Milestone Medical, approximately 86%as of June 30, 2016, we have determined that we have control of Milestone Medical and have consolidated Milestone Medical in the accompanying condensed consolid

ated financial statements.

Milestone Education LLC

Milestone Education is a 50% owned subsidiary of Milestone Scientific which began operations in 2013 to provide training and education to our dentists throughout the world. Milestone Scientific accounted

for its investment in Milestone Education using the equity method of accounting through December 31, 2015. Approximately 83% of the revenue earned by Milestone Education is from services performed for Milestone Scientific. As a result of this relationship, we concluded that we have the power to direct the activities that most significantly impact Milestone Education’s economic performance, and that it is a VIE and should be consolidated in the financials of Milestone Scientific in the first quarter of 2016.

The financial statements of Milestone Medical and Milestone Education are included in the accompanying condensed consolidated financial statements.

The financial information in the table below summarizes the combined results of operations of Mileston

e Scientific, and its subsidiaries including Milestone Medical and Milestone Education (a VIE) on a pro forma basis as though the companies had been combined as of the beginning of the earliest period presented. The pro forma financial information is presented for informational purposes only and is not indicative of the result of operations that would have been achieved if the consolidation had taken place at the beginning of the period presented.

	June 30, 2015 Pro Forma

Total revenue	$	4,590,067
Cost of products sold		1,507,552
Gross Profit		3,082,515
Selling, general and administrative expenses		6,148,121
Research and development expenses		384,752
Operating expenses		6,532,873
Loss from operations		(3,450,358	)
Other expenses		-
Interest income		(3,412	)
Total other expenses, net		(3,412)
Loss before provision for income tax and equity in net earnings of equity investments		(3,453,770	)
Provision for Income Tax		(13,646	)
Loss before equity in net earnings of equity investments		(3,467,416	)
Loss on earnings from Milestone Medical		-
Loss on earnings from Education Joint Venture		-
(Loss) Gain on earnings from China Joint Venture		(63,979	)
Loss in equity investments		(63,979	)
Net loss		(3,531,395	)
Less: Net loss attributable to the noncontrolling interests		1,038,888
Net loss attributable to Milestone Scientific Inc.	$	(2,492,507	)